Outlook of Reliance Industries

Reliance Industry is one of the TOP 10 producers of petrochemicals in the world. But the stock performance has been disappointing in the recent past. From a high of Rs.1550 in Jan 2008, this share has fallen by 42% to Rs.658 as of today (23-May-2012). Many investors who were believing RIL would deliver miracle are confused wheather to hold on to this stock or not.

Following are few facts which could be of use to such investors:

• RIL is a  net debt free company. It has gross cash balance of Rs.74539 Crores and debt of Rs.74503 Crores.
• Managing this cash itself is a hugh problem for company. They have diversified into non core areas like investment in EIH Hotels taking 18.5% stake.But is not of stategic importance for RIL.
• The main contentious issues for RIL has been : fall in production of GAS from KG-D6 block in KG Basin and reduction in refining margins from 19.1USD per barrel to 6.8USD per barrel.
• Reduction in margin is more due to subdued global economic environment.
• But the fall in Natural Gas production from KG Basin 'accidentally' coincides with GAS Pricing of contract awarded to RIL by Govt of India.
• To dig it bit deeper, RIL won the contract for Oil drilling by accepting to sell gas at US$ 4.2/mmBtu till Feb 2014.
• In the mean time, war between Ambani brothers broke out and the younger brother Mr.Anil Ambani had a family settlement which said that his elder brother would sell gas to him at US$2/mmBtu. But Supreme court upheld law and Mukesh Ambani won. This was a big blow for younger Anil.
• After settling this 'family' issue, Mukesh controled RIL approached Oil ministry and government for upward revision of Gas price, since the actual import cost of GAS was much higher that it was produced in India.
• But government firmly said that they cannot revise the price till Feb 2014.
• Now RIL keeps saying that the production in GAS has been falling.
• Probably when the GAS Pricing is revised, RIL would say GAS Production is improving.
• In the mean time, there are reports which says that Government is seriously considering upward revision of gas price.
• If this price revision is preponed,  it is likely to benefit the Mukesh Ambani-owned RIL by around $8 billion and sharply increase the government's subsidy bill.
• Worst case, price would be revised in 2014, 2 years from now.

As an investor, now what should you do. The contentious issue has been GAS Pricing. And RIL has got a share buy back program upto maximum of Rs.840 per share. At current price of  Rs.658 investors can hold on for next two to three years. Probably they would make decent profits.